SEC Good at Fining, Bad at Collecting

GAO says commission lousy at collecting receivables; changes coming? Plus: securitization market in Germany gets big boost, while in U.S., banks starting to waiver.

After corporate income tax, trade tax is the most important tax levied on companies doing business in Germany. Effective rates range between 11 percent and 19 percent, as adjusted by add-backs and deductions.

Under the old regime, the biggest add-back for securitization purposes was 50 percent of the interest payable on debt with a term of at least one year. Interest payable on the financing raised by SPVs would often qualify as interest on long-term debt. That meant that an SPV, if deemed to be resident in Germany, would be subjected to a sizeable trade tax burden — even though it may not make a sizeable profit.

“Trade tax has always been a big thorn in the side of German securitization,” notes Martin Krause, a Frankfurt-based tax partner at law firm Linklaters Oppenhoff & Rädler.

Under the new rules, SPVs buying loan receivables from banks in securitization transactions will be treated like the originator banks, and will be exempted from the add-back.

The reforms amount to “a breakthrough for securitization in Germany,” says Ingo Kleutgens, a tax partner at law firm Mayer, Brown, Rowe & Maw in Frankfurt. After all, he notes, what’s good news for German banks is good news for corporates. Now that banks can refinance loans more cheaply through securitization, they can, in theory at least, pass on those cheaper financing costs to corporates through their credit policies.

Many in the market expect trade tax relief for SPVs buying corporate assets “within two or three years”. But in the meantime, the government’s vote of confidence is in itself cause for celebration. “This was the first time a finance minister actually stood up and supported securitization as a tool,” notes Dagmar Schemann-Teuber, managing director of ABS+MBS Consulting, a Dachau-based firm. “That’s the best news of all from the corporates’ perspective.”

The Currency of Time

In March, The Goodyear Tire & Rubber Co. announced it was getting a much-needed cash infusion from JP Morgan Chase & Co. and Citigroup Inc. The banks promised a $1.3 billion asset-backed credit facility with just one catch: it is contingent on Goodyear’s ability to amend loan covenants it has breached with other lenders. Signs look good: Goodyear has already obtained waivers from creditors that buy the company time to forge new deals.

Goodyear is not alone. The soft economy has pushed plenty of businesses into violation of their loan covenants. Some of the lucky ones, including Tweeter, Atlas Air, Conseco, and Beta Brands, have also received waivers.

“An awful lot of companies are busting covenants and obtaining waivers these days,” says Carter Pate, managing partner of PricewaterhouseCoopers LLP’s Financial Advisory Services.

Obtaining a waiver is usually the final step in renegotiating loan terms with lenders. This comes at a price. Typically, banks can charge as much as 1 percent or more of the outstanding loan to rewrite the loan structure, says Pate. He adds that the difficulty of obtaining a waiver depends on the situation; breaking substantial covenants such as free-cash-flow targets will likely result in lengthy negotiations.

Patrick Chow, CFO of Tarrant Apparel Group, says the ease of getting a waiver often depends on the lender. “Banks that understand your business are more sympathetic,” he says. “But no bank wants to put you into default and have a loss.”

Tarrant was forced to obtain a waiver from lenders GMAC and Bank of America Corp. when softness in the apparel business put the Los Angeles-based private-label apparel maker out of compliance with its loan covenants.

When approaching the bank, “you have to be honest with yourself,” warns Chow. “Setting unrealistic objectives and trying to paint a rosy picture to bankers will kill the company.” You don’t want to end up knocking on their door again the next quarter, he adds.


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